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Japan to add crypto as a funding method for startups in a bid to boost Web3 offerings

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(Kitco News) - The Japanese government has just announced a shake-up in the way startup companies can raise capital as reports indicate they plan to allow companies to raise funds through the issuance of crypto assets, such as currencies, instead of stocks.

According to a report from Nikkei Asia, startups looking to launch in Japan will now be permitted to raise money from venture capital firms by selling digital assets, providing more funding avenues for up-and-coming companies involved in blockchain technology.

“The change would widen the range of assets open to limited partnerships,” the report said.

Venture capital firms typically use limited partnerships to pool capital with other companies for startup investment, which caps their exposure to the money they put in. Up to this point, Japanese financial laws have restricted limited partnerships to more conventional assets, such as shares, stock options, and security tokens. The new rule adds other tokens and crypto assets to this list.

Blockchain-based tokens offer a range of benefits not offered by more conventional assets, including the ability to be created quickly without needing to go through an intermediary such as a brokerage firm. The addition of crypto as a funding method is expected to primarily benefit companies involved in next-generation Web3 technologies.

Web3 startups worldwide raised $15.1 billion in 2022, 15 times the 2018 total, CB Insights data shows. Funding activity for these companies experienced a decline near the end of 2022 after the FTX bankruptcy but appears to have bottomed out in Q1 2023 and is once again on the rise.

The Japanese government is now looking to remove the restrictions blocking limited partnerships from investing in tokens to allow Japanese venture capital firms and institutional investors to participate in and benefit from the growth of the Web3 industry.

The government plans to submit the necessary legal revisions to the parliament as early as 2024. They intend to revise the tax code for fiscal year 2024 and beyond to exempt crypto assets and tokens from a tax on unrealized gains based on market value, which has been cited as a reason why some are reluctant to invest in the field.

Japan is also in the process of removing restrictions on limited partnerships that require them to invest more than half their capital domestically in an effort to help boost their profits, which would give them more capital to invest in domestic startups.

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While delivering the keynote address at the WebX conference in Tokyo in July, Japanese Prime Minister Fumio Kishida reaffirmed the country’s commitment to fostering the Web3 industry and highlighted its potential to transform the internet and kindle social change.

In August, the country’s financial regulatory authority, the Financial Services Agency (FSA), proposed a change to the tax code around digital assets to free domestic firms from the end-of-the-year “unrealized gains” tax on crypto.

Earlier in the year, a group of well-known Japanese companies – including Mizuho, Mitsubishi and Sumitomo Mitsui – announced a new collaboration designed to help advance Japan’s metaverse plans with the creation of the “Japan Metaverse Economic Zone.”

According to the agreement signed by the ten participating corporations, they will work together to build an open metaverse infrastructure called Ryugukoku, which will “enable interoperability between different Metaverse platforms, as well as collaboration among Metaverse platforms, and will serve as a new social infrastructure for enterprise DX [digital transformation] such as information dissemination, marketing, work style reform for domestic enterprises, marketing, as well as consumer DX and consumer EX (Experience Transformation).”

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